Officials in charge of managing French and Italian public debt have warned
that Europe’s ‘Tobin Tax’ on financial trades risks damaging the sovereign
bond market and may prove self-defeating.

Both France and Italy have been keen advocates of the new Financial Transaction Tax (FTT) proposed by Brussels last month, claiming that it will raise money and curb speculation. But they may have overlooked the unintended effect on their own borrowing costs.

Maya Atig, acting chief of French debt agency, said the European Commission’s internal documents acknowledge that the FTT could drain liquidity in the bond markets by 15pc, an effect that would push up yield spreads and raise debt costs.

Brussels estimates that the tax will raise €30bn to €35bn each year for the eleven EU states taking part, but Mrs Atig told a Euromoney conference in London that any revenue would offset “the extra costs that we might have to pay”.

She said the French government is searching for ways to ensure that the tax does not “perturb” the bond market. “This something still to be discussed.”

Maria Cannata, director of Italy’s debt agency, said her country already has a version of the Tobin Tax but has been careful to exempt sovereign debt, adding that policy-makers must bear in mindful the “importance of not damaging the government bond markets”.

The proposal - now in the hands of working groups - is to come into force in early 2014. It will raise a fee of 0.1pc for shares and bonds, and 0.01pc for derivatives.

These rates are far higher than the Swedish tax in 1989 that led to an 85pc crash in bond sales, a 98pc fall in bond futures, and shut-down of options trading, before the experiment was abandoned.

Gabriele Frediani, head of the electronic fixed income market MTS, said the tax would cause repurchase or Repo trades to plunge by 99pc. “The Repo market would disappear overnight,” he said.

The Repo market serves as a vast pawn shop allowing banks to raise funds on money markets by pledging assets. It is a key source of short-term finance for firms, but by its nature it involves fast turn-over.

Brussels said it had changed the text after listening to concerns. Repo trades will be treated as a single transaction instead of two, halving the tax. Short-term loans with collateral will be exempted.

It said the FTT will cover the secondary market for bonds only, insisting that good yield on long-term debt will “still leave enough room for profit after the tax is applied”.

Markus Beyrer, head of the pan-EU industry lobby BusinessEurope, said he was “very disappointed” by the draft text, calling it a threat to growth and jobs.

The text includes an “issuance principle”, meaning that the tax will cover bonds and other assets issued in the eleven countries taking part, even if they are traded in London. This may breach “extra-territoriality” codes.

The Chancellor, George Osborne, said the FTT scheme would amount to a tax on pensioners and cost up to 1m jobs across the EU “without costing bankers a penny”. The traders would migrate to the US or Asia, taking the financial industry with them.